Be ready to earn more on
your PPF, NSC and other small savings deposit schemes from 1st
December 2011. The interest rates on
these investments have been overhauled and shall hence forth earn market linked
returns. The Government has decided to
implement the recommendations made by Committee headed by Smt. Shyamala
Gopinath, Deputy Governor of Reserve Bank of India in June 2011. Bachhat
had carried an article on the recommendations made by the Committee which
can be read here.
Changes
in Structure of Small Savings Schemes
There have been changes in
the small savings schemes available for investors. Kisan Vikas Patra will be discontinued from
1st December 2011. Further, the
maturity of post office Monthly Income Scheme (MIS) and National Savings
Certificate (NSC) is reduced from 6 years to 5 years. Investors, willing to invest for longer tenure,
shall have one more NSC instrument with a maturity period of 10 years.
As regards Public Provident
Fund (PPF), the annual ceiling of contribution which currently is at Rs. 70,000
has been increased to Rs. 1,00,000 annually. A taxpayer can now avail entire Section 80C
benefit of Rs. 1,00,000 by just investing in PPF. To discourage pre-mature withdrawals,
interest rate on advances against PPF deposits is revised to 2% higher than the
prevailing PPF interest rates. Currently
it is 1% higher than the PPF rates.
An investor shall be able
to make pre-mature withdrawal from post office time deposits but shall earn
rate of interest 1% less than the time deposit of comparable maturity.
Thus now the tenure available
for investors are 1, 2, 3, 5, 10 and 15 years.
Revised
Interest Rates from 1st December 2011
The rate of interest on
small savings schemes shall be aligned with Government Securities’ rates of
similar maturity with a spread of 25 basis points (bps). 100 bps is equal to 1 percentage point. The spread shall be 50 bps for 10 year National
Savings Certificate and 100 bps for Senior Citizens Savings Scheme (SCSS). These interest rates shall be reset every
year before the beginning of the financial year based on the market rates at
that point of time. Further payment of
5% bonus on maturity of MIS has also been discontinued.
Based on the prevailing
market rates, from 1st December 2011 till 31st March
2012, the rate of interest on various small savings schemes has been reset as
follows:
|
Instrument
|
Current Rate (%)
|
New Rate (%)
|
|
Savings Deposits
|
3.50
|
4.00
|
|
1 Year Time Deposits
|
6.25
|
7.70
|
|
2 Year Time Deposits
|
6.50
|
7.80
|
|
3 Year Time Deposits
|
7.25
|
8.00
|
|
5 Year Time Deposits
|
7.50
|
8.30
|
|
5 Year Recurring Deposits
|
7.50
|
8.00
|
|
5 Year SCSS
|
9.00
|
9.00
|
|
5 Year MIS
|
8.00 (6 yr MIS)
|
8.20
|
|
5 Year NSC
|
8.00 (6 yr NSC)
|
8.40
|
|
10 Year NSC
|
New instrument
|
8.70
|
|
PPF
|
8.00
|
8.60
|
The above rates shall be
reset on 1st April 2012. To
avoid year-on-year volatility, the committee had suggested a cap of 100 bps so
that the rates are neither raised nor reduced by more than 1% from one year to
the next, even if the market rates fluctuate by higher margins. Surprisingly, the notification is silent on
this aspect.
As recommended by
Committee, the commission earned by agents for garnering deposits has also been
slashed. The agent shall not earn any
commission on PPF and SCSS. The commission
of 1% earned on all other schemes has also been reduced to 0.5%. This is a welcome change and henceforth, the
motivation of the agent to sell such schemes shall not be commission, but the suitability
of the scheme to the investor. This and
similar changes which happened in mutual fund industry earlier, will encourage emergence
of fee based financial service industry wherein agents charge customers
directly for the services provided by them.
Bachhat’s take
